Mortgage Market Update

Another volatile week occurred and that will likely continue to be the pattern moving forward.  The good news was mortgage backed securities gained about 41bp on the week, letting rates improve slightly for some.  More importantly, they remained in their current trading range after again testing their 50-day moving average.

The week started off well, but the move higher was quickly snuffed.  Tuesday started the move lower and Wednesday’s ADP report shocked the market with an inaccurate forecast of the job picture, sending bonds lower than their 50-day MA, causing some concerns.  However, bonds managed to hold their head above the waterline and Friday gave them some great news (bad for our economy though).

I am sure you all heard about the disastrous jobs data released Friday.  Not only were the numbers for March the biggest loss in five years, but the previous months’ data was also revised lower.  This provides viable evidence that we are in a recession.

But where do bonds go from here?  Will they maintain their sideways trading pattern, or is a breakout inevitable?

The week ahead does not have much “regularly scheduled programming” of data with the main event being Tuesday’s release of the FOMC Minutes, the inside look at the Fed’s thoughts at their last decision.  Since there were two dissenting votes instead of just one, the inside scoop could move the markets.

Here is this week’s breakdown:

• Tuesday:  FOMC Minutes (14:00)
• Wednesday:  Crude Inventories (10:30)
• Thursday:  Initial Jobless Claims (8:30), Balance of Trade (8:30)
• Friday:  Consumer Sentiment (10:00)

As you can see, there is not much coming this week.  That does not mean market movers will not show up elsewhere, such as Fed speeches, etc.  It does mean that technical indications will likely play a larger role this week, so they are worth looking at.

Stochastics show bonds to be in an overbought condition, so a correction is likely.  Bonds are currently trading in the middle of a sideways pattern that is nearly 150bp wide, allowing significant movement within and not breaking the pattern.

This week, cautiously floating, leaning towards locking is how I am starting.  Chances are we will see a correction of sorts this week, though the pattern will be hard to break, especially if tomorrow’s FOMC Minutes don’t do it.